This FAQ is *not* intended as a comprehensive
guide to trader status taxation. That is covered in the
TradersTaxPlan™ This FAQ is a fast and easy way to
get answers to general questions, many of which are so often
misrepresented over the internet

A method of identifying specific shares of
securities to be sold for tax purposes--also called "vs. purchase." If
versus purchase is not specifically stated at the time of sale, the
IRS deems the securities sold are made on a first-in first-out
(FIFO) basis.

Typically, you can have your broker add a
memo line to your confirmation statement, per your instructions. For
example, if you're selling the 100 shares you bought on March 31,
2008, ask your broker to write on your confirmation that the
transaction is a sale "vs. purchase 3/31/08." For online trades, you
should immediately follow up with a phone call to specify your
instructions.

Exceptions to matching buys and sells on the FIFO basis exist for
mutual fund shares (for which taxpayers generally elect to use the
rolling average cost basis) and for publicly traded partnerships
(for which IRS Rev. Rul. 84-53 requires a rolling average cost
basis, referred to as a unified/unitary basis, in the PTP units).

An exception to the exception for PTP units is found in
IRS Regs. 1.1223-3(c)(2)(i). The partner may make an
election under Regs. 1.1223-3(c)(2)(i)(C) as follows: "The
selling partner [may elect] elects
to use the identification method for all sales or exchanges
of interests in the partnership after September 21, 2000. The
selling partner makes the election referred to in this paragraph
(c)(2)(i)(C) by using the actual holding period of the portion of
the partner's interest in the partnership first transferred after
September 21, 2000 in reporting the transaction for federal income
tax purposes."

The sale of a security at a loss and the
purchase of shares within 30 days while continuing to hold either a
long or short open position in the security. The IRS temporarily
disallows (defers) such losses for tax purposes. The IRS also
extends the wash sale prohibition to closing short sales. See The Wash Sale Rule for more detailed information.

You can legitimately accomplish nearly the same thing by taking out an advance on
a home equity line of credit, or a cash advance on a Mastercard/VISA.

update 2005:
The NASD now accepts the fact that friendly loans are a part of life
and should be none of their business.
click here for original source of this statement: In some cases, firms may arrange loans for
customers from other sources, and there have been instances of
customers making loans to other customers to finance securities
trades. A customer that lends money to another customer should be
careful to understand the significant additional risks that he or
she faces as a result of the loan, and needs to carefully read any
loan authorization forms. A lending customer should be aware that
such a loan may be unsecured and may not be eligible for protection
by the Securities Investor Protection Corporation (SIPC). The firm
may not, without direction from the borrowing customer, transfer
money from the borrowing customer’s account to the lending
customer’s account to repay the loan.

Vendors of Nasdaq® real-time market data are required to identify
the non-professional status of any subscriber for whom they are
seeking to pay the lower, non-professional subscription rate for
Nasdaq Level 1 ServiceSMor Nasdaq Quotation Dissemination
ServiceSM.

To qualify for the lower, non-professional
rate, an individual subscriber must be able to answer "NO" to all
of the following questions:

Are you registered with any state,
federal, or international securities agency or self-regulatory
body?

Are you engaged as an Investment
Advisor?

Are you employed by an organization that
is exempt from U.S. securities laws that would otherwise require
your registration?

Is your Nasdaq Subscriber Agreement
signed in a business or organizational name?

Are you using or planning to use Nasdaq
data for any reason other than personal use?

If the subscriber can answer "YES" to any
of these questions, Nasdaq considers the subscriber to be
professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq
Vendor Agreement, definition of the phrase "non-professional" did
not change.

Distributors of NASDAQ® real-time market data are required to
identify the non-professional status of any subscriber for whom they
are seeking to pay the non-professional subscription rates. NASDAQ
is reiterating its guidance on existing NASDAQ Rules and policies
and is offering further clarity on the ability to classify
non-commercial organizations as non-professionals in certain
instances.

registered nor qualified in any
capacity with the SEC, the Commodities Futures
Trading Commission, any state securities agency, any
securities exchange or association or any
commodities or futures contract market or
association;

Please note that the phrase "professional
subscriber" applies to all other persons who do not meet the
definition of non-professional subscriber.

To qualify for the lower, non-professional
rate, an individual subscriber must be able to answer "NO" to all
of the following questions:

Question

Discussion

Is the NASDAQ Subscriber Agreement
signed in the name of a business or
commercial entity?

Because a non-professional
subscriber must be a natural person,
the NASDAQ Subscriber Agreement1
must be signed by an individual.
If the NASDAQ Subscriber
Agreement1
is signed in the name of a business
or commercial entity, it is
considered professional use.
~

Is the subscriber a subcontractor or
independent contractor?

Because subcontractors and
independent contractors are deemed
to be extensions of the firm rather
than natural persons, they are
considered professionals.If the subscriber is a
subcontractor or independent
contractor or has a business
relationship with the firm, it is
considered professional use.
~

Is the subscriber a securities
professional?

If the subscriber is:

registered with
any state, federal
or international
securities agency or
self-regulatory
body.

engaged as an
Investment Advisor.

employed by an
organization that is
exempt from U.S.
securities laws that
would otherwise
require
registration?

Any use by a securities
professional is considered
professional use.
~

Is the subscriber using or planning
to use NASDAQ data for any reason
other than personal use?

Any use of data for business,
professional or other commercial
purpose is not compatible with
non-professional status, even if the
commercial use is on behalf of an
organization that is not in the
securities industry.

Are you registered with any state,
federal, or international securities agency or self-regulatory
body?

Are you engaged as an Investment
Advisor?

Are you employed by an organization that
is exempt from U.S. securities laws that would otherwise require
your registration?

Is your Nasdaq Subscriber Agreement
signed in a business or organizational name?

Are you using or planning to use Nasdaq
data for any reason other than personal use?

If the subscriber can answer "YES" to any
of these questions, Nasdaq considers the subscriber to be
professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq
Vendor Agreement, definition of the phrase "non-professional" did
not change.

A federal tax
lien (pronounced "lea-en"
similar to the 2nd
syllable in the word "alien") is the U.S. Government’s legal claim
against your property when you neglect or fail to pay a tax debt.
The lien protects the government’s interest in all your property,
including real estate, personal property and financial assets. A
federal tax lien exists after the IRS:

Assesses your liability;

Sends you a bill that
explains how much you owe (Notice and Demand for
Payment); and

A lien is not a levy. A lien secures the government’s
interest in your property when you don’t pay your tax debt. Whereas,
a
levy actually takes the property to pay the tax debt. If you
don’t pay or make arrangements to settle your tax debt, the IRS can
levy, seize and sell any type of real or personal property that you
own or have an interest in.

Joint Back-Office. Section 220.7(c)
of Regulation T authorizes the creation of JBO arrangements. These
JBO arrangements permit "a creditor [to] effect or finance
transactions of any of its owners if the creditor is a clearing and
servicing broker or dealer owned jointly or individually by other
creditors." 12 CFR 220.7(c).

Arthur Levitt , Chairman of the U.S. Securities and Exchange
Commission
September 16, 1999 said:
When day-trading firms are organized as LLCs and individual day
traders contribute to the firm's capital, the day traders are
permitted to trade using the firm's capital. These LLC firms
typically participate in joint back office ("JBO") arrangements,
which allow them to enhance their borrowing power. JBO
arrangements have become popular because they allow day-trading
firms to receive preferential margin treatment from their clearing
firms. Specifically, a day-trading firm that participates in a JBO
arrangement can receive credit from its JBO clearing firm on "good
faith" terms. As a result, the customer margin requirements found in
Regulation T and SRO rules do not limit the extension of credit to a
JBO participant. Rather, credit can be extended for up to 100
percent of the purchase price of the securities. As discussed below,
the SROs have proposed revisions to their rules that would make
these JBO arrangements more difficult to use.

Because of the borrowing power permitted by JBO arrangements, the
leverage of day-trading firms organized as LLCs is limited only by
the net capital rule. This essentially allows firms to leverage
their position 6 to 1, rather than the 2 to 1 leverage allowed day
traders under SROs' rules.

General rules:

1. Each JBO participant must be registered as
a broker-dealer pursuant to Section 15 of the Securities Exchange
Act of 1934 and subject to the capital requirements prescribed by
Rule 15c3-1 therein; and shall not be eligible to operate under the
provisions of SEC Rule 15c3-1(b)(i).

2. Each JBO participant must meet and maintain
a minimum account equity requirement of $1,000,000 with each
clearing broker-dealer where a JBO account is carried. If equity is
below $1,000,000 the carrying organization must issue a call for
additional funds or securities which shall be obtained within five
business days. If funds or securities sufficient to eliminate the
deficiency are not received within 5 business days, the carrying
organization must margin the account in accordance with the
requirements prescribed for a customer in Regulation T and Exchange
Rule 12.3.

3. Each JBO participant must meet and maintain
the ownership standards established by the clearing broker-dealer;
and

4. Each JBO participant must employ (or have
access to) a qualified Series 27 principal.

Is FAFSA really due in February? You
should try to file as soon after January 1st as possible because the
"powers that be" need to work on your application. But the
fact is that you can submit the application on an honest, best
efforts basis (for example, using the prior year's data as a guide)
and then amend the submission at a later time. FAFSA calls
amending the application "making corrections" to the application,
and they allow such corrects to be made as much as a full year after
the initial due date. It is generally most advisable though to have
the final amended numbers submitted prior to the start of the
semester.
http://www.fafsa.ed.gov/FOTWWebApp/complete014.jsp

Federal Reserve Board's definition prior to
2009:
...the depositor is permitted or authorized to make no more than six
transfers and withdrawals, or a combination of such transfers and
withdrawals, per calendar month or statement cycle . . . to another
account (including a transaction account) of the depositor at the
same institution or to a third party by means of a preauthorized or
automatic transfer, or telephonic (including data transmission)
agreement, order, or instruction, and no more than three of the
six such transfers may be made by check, draft, debit card, or
similar order made by the depositor and payable to third parties.

Operation Twist was a
Federal Reserve program
started between QE2 and QE3 - running
from September 2011 through June 2012 to further help
stimulate the economy. Operation Twist was the nickname for this
plan of buying $40B per month in longer-term Treasuries and simultaneously
selling some of the shorter-dated issues it already held in order to
bring down long-term interest rates. The term “Operation Twist” was
first used in 1961 – in a reference to the Chubby Checker song –
when the Fed employed a similar policy.

Operation Twist was
expanded and raised the monthly purchases from $40B to $45B,
during June 2012 and to continue until December 2012, effectively
overlapping on QE3 a bit; for a total of $85B in monthly
purchases.

The pure trust scam has been around for
decades, but with the internet the pitch has become more
wide-spread. The IRS has a few links which verify that most pure
trusts are scams:
link #1
and
link #2
(formerly
link #2b) and
link #3. Many of the other trusts
being promoted that are not actually scams do not eliminate income taxes
as the trustee is usually lead to believe
pdf
file of IRS publication #2193 and
pdf
file of IRS publication #4310. Well designed trusts can be very useful,
especially for wealthy individuals, but trusts do not eliminate
taxes the way the pure trust promoters suggest they do.

Nevada Corporations have many beneficial
purposes, just like corporations formed elsewhere can be
beneficial. But as far as many claims of tax avoidance that
are often associated with corporations formed in Nevada, much of it
does not hold true for people who do not actually live in Nevada but who at the
same time want to use and control the assets held by the
corporation.

These guys are referred to as "Tax Protestors"
by the government. Whether they have valid arguments and
whether people who interpret what they have to say as meaning that
they do not have to pay federal income tax is besides the point.

Let's re-read that one more time: Whether the federal income tax
system is legal or not is besides the point!

Let's assume that these so called "Tax Protestors" are not a bunch
of charlatans looking to peddle their books, tapes and seminars for
their own profit. Rather, just for the sake of argument, let's
assume that they are well-meaning patriots looking to help all of us
stop paying unnecessary or even illegal federal income taxes.

The fact is that no matter how accurate these Tax Protestor theories
are, if you do not pay your federal income taxes, by using any of the
arguments promoted by these guys, the government (and that includes
the IRS, the US Court system and our elected lawmakers in
Washington, D.C.) will not be swayed and your life will become a
living hell!

If by using any of these Tax Protestor theories you don’t report your
federal income taxes on properly prepared tax forms, the IRS will
come in to assess taxes based on whatever information they can find.
They'll add in penalties and interest and then they'll garnish
your wages, take backup withholding from your securities sales
(that's on the gross sales amount, not on the net gain), and
seize all your available assets to pay for it all. You can then go
into court to fight a battle thinking that you are 100% correct, and
there you will find that no matter how many years of your life you
devote to fighting, there is a 100% chance that the court will never
agree with you and you will lose everything you have.
THAT'S the point.

Irwin Schiff, who wrote "The Federal Mafia: How It Illegally Imposes
and Unlawfully Collects Income Taxes," argues there is no legal
requirement to pay income taxes. Government lawyers have been
pursuing civil actions to bar him from selling his book and holding
tax seminars.

"There is no magic way out of paying taxes," said Eileen O'Connor,
assistant U.S. attorney general for the tax division in Washington,
D.C.

Prosecutors say the three were responsible for nearly 5,000 tax
returns that fraudulently reported no income. These "zero returns"
included zeros on every line related to income and expenses and
often claimed a full refund of all federal taxes withheld or paid.

The evidence presented at trial proved that Schiff evaded the
payment of more than $2 million in taxes he owed the IRS between
1979 and 1985. And that Schiff concealed income he earned from
Freedom Books, in part, by using offshore bank accounts and
conducting financial transactions through secret "warehouse" banking
services. The evidence also showed that Schiff used debit cards
issued by offshore banks to obtain funds he transferred offshore,
that he opened bank accounts using multiple tax identification
numbers and that he concealed his wealth by hiding his assets
through the use of nominees.

Schiff is currently serving a 12.5 year sentence for his October
2005 conviction of conspiring to defraud the United States and
aiding and assisting in the preparation of false income tax returns.
In September 2008 an additional 11 months was added for 15 counts of
criminal contempt relative to Schiff's unruly behavior during the
trial. In October 2008 a federal court in Las Vegas issued a
permanent injunction barring Schiff and his former associate,
Cynthia Neun, from preparing federal income tax returns for others
and from promoting Schiff’s fraudulent "zero tax" plan or other
tax-fraud plans. The court order makes permanent a restraining order
and preliminary injunction entered against the two notorious tax
defiers in 2003.

Trial Date Set For Former IRS Criminal Investigator
Joseph Banister is a former IRS Criminal
Investigation Division Special Agent. After years of researching the
income tax code, Banister came to the conclusion that the government
was misapplying the tax code to the majority of Americans. This
highly trained CPA and valued IRS criminal investigator presented
his findings to his superiors all the way to Washington, DC and
asked them to dispute his findings.

On November 18, 2004, Banister was arrested on a federal indictment
accusing him of tax crimes. He pleaded not guilty in U.S. District
Court, posted bond and was released. The indictment ties Banister to
a co-defendant, Walter A. Thompson of Redding, California who has
also been indicted regarding his stand on withholding taxes.
Thompson refused to surrender to federal authorities, but instead
fled and ended up with a high speed chase on Interstate 5 in
Northern California. Thompson is considered a flight risk and denied
bail.

Both Banister and Thompson appeared in court on December 1, 2004, at
the U.S. District Court in Sacramento, California for a status
conference. Thompson was in an orange jump suit and shackled in
chains with his hands chained to his waist. Judge William B. Shubb
granted Thompson's request to represent himself, but also appointed
a federal public defender for Thompson to assist in his defense.

The IRS shut this scam down as well. IRS
Notice 2002–35 The Internal Revenue Service and the Treasury
Department have become aware of a type of transaction, described
below, that is used by taxpayers to generate tax losses. This Notice
alerts taxpayers and their representatives that the tax benefits
purportedly generated by these transactions are not allowable for
federal income tax purposes.

In general, the transaction involves the use of a notional principal
contract (“NPC”) to claim current deductions for periodic payments
made by a taxpayer (“T”) while disregarding the accrual of a right
to receive offsetting payments in the future. The NPC has a term of
more than one year. Under the NPC, T is required to make periodic
payments to CP at regular intervals of one year or less based on a
fixed or floating rate index. In return, CP is required to make a
single payment at the end of the term of the NPC that consists of a
noncontingent component and a contingent component. The
noncontingent component, which is relatively large in comparison to
the contingent component, may be based upon a fixed or floating
interest rate. The contingent component may reflect changes in the
value of a stock index or currency. T may fund its obligation to
make periodic payments in whole or in part by borrowing funds from a
lender, who may be CP. In addition, T may engage in other
transactions, such as interest rate collars, for purposes of
limiting risk with respect to the NPC transaction. T may engage in
short-term trading activity in securities with a view to
establishing a trade or business. T may also engage in the
transaction through a partnership, in which case instead of T, the
partnership may engage in some or all of the activities described
above. T will likely enter into an agreement with CP to terminate
the NPC prior to the scheduled payment date of CP’s payment. T
deducts the ratable daily portion of each periodic payment for the
taxable year to which that portion relates. However, T does not
accrue income with respect to the nonperiodic payment until the year
the payment is received. T intends to report as capital any gain it
realizes upon the termination of the NPC.

The Service may impose penalties on participants in these
transactions or, as applicable, on persons who participate in the
promotion or reporting of these transactions, including the
accuracy-related penalty under section 6662, the return preparer
penalty under section 6694, the promoter penalty under section 6700,
and the aiding and abetting penalty under section 6701. Transactions
that are the same as, or substantially similar to, the transaction
described in this Notice 2002–35 are identified as "listed
transactions" for purposes of § 1.6011–4T(b)(2) of the Temporary
Income Tax Regulations and § 301.6111–2T(b)(2) of the Temporary
Procedure and Administrative Regulations. See also § 301.6112–1T,
A–4. It should be noted that, independent of their classification as
“listed transactions” for purposes of §§ 1.6011–4T(b)(2) and
301.6111–2T(b)(2), such transactions may already be subject to the
tax shelter registration and list maintenance requirements of §§
6111 and 6112 under the regulations issued in February 2000 (§§
301.6111–2T and 301.6112–1T, A–4), as well as the regulations issued
in 1984 and amended in 1986 (§§ 301.6111–1T and 301.6112–1T, A–3).
Persons required to register these tax shelters who have failed to
register the shelters may be subject to the penalty under section
6707(a), and to the penalty under section 6708(a) if the
requirements

Bond and Option Sales Strategy is a tax
shelter that the IRS banned in December 1999 saying that the tax
treatment created artificial losses to offset legitimate gains.
In this scheme, taxpayers and promoters use a series of contrived
steps in an attempt to generate tax losses to offset income from
other transactions.

Son of BOSS. Transactions in which losses are
generated as a result of artificially inflating the basis of
partnership interests. Notice 2000-44, 2000-2 C.B. 255 (Aug. 14,
2000).

Son of Boss is a spinoff of an earlier shelter known as BOSS, for
bond and option sales strategy. Under Son of Boss, buyers used
financial products such as currency options to create bogus losses
that offset their gains from selling stock options or business
assets.

The IRS announced that use of a grantor trust in conjunction with
the so-called son-of-BOSS shelter (a shady reincarnation of the
original Bond and Option Sales Strategy deal, itself a shelter
transaction of questionable merit) would be treated as evidence of
criminal fraud.

The Browns say are willing to pay whatever
they are bound by law to pay, they ask only that they are shown the
law. In fact, they have offered $1,000,000 in commercial property if
anyone could "Show Ed the Law". Instead The Law came on Thursday,
June 7, 2007, claiming this million dollar property as their own,
not exactly what Ed had in mind. The Browns have been inside
their home for the past few months, they say they will stay in their
home, and will fight to the death if they have to.

In 1994 The couple began writing the IRS asking to see the Law that
obligates them to pay a Federal Income tax, and for two years they
received no answers. In 1996 they informed the IRS that they would
no longer be paying their taxes. They are willing to die, and the
government would rather kill them then show them the law.

October 18, 2007 - Teams of federal law
enforcement officers, including members of the United States
Marshals Service (USMS), the Bureau of Alcohol, Tobacco, Firearms
and Explosives (ATF), and the IRS Criminal Investigation Division,
concluded their search of the Plainfield, NH, property formerly
owned by Edward and Elaine Brown. The search and collection of
evidence -- including the rendering safe of a large number of
improvised explosive devices (IEDs) -- was a painstaking process
that lasted almost two weeks.

The Brown’s home and dental building have been seized, secured,
posted, and are in the custody of the Treasury Department. The
property will proceed through the usual asset forfeiture process and
may ultimately be sold to satisfy the judgment imposed by the Court.r>